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During the last year there has been some discussion about Steam being a monopoly which will of course result in the death of PC gaming (again), mass riots, economic crashes and the end of the world or at least society as we know it generally. To be fair though, almost anything might lead to total chaos and destruction according to the majority of people who post on teh Internets.

Well, currently Steam does not have a monopoly, as some people have pointed out (see this article on Games Brief). The main reason is that steam although clearly dominating the market for digitally distributed games by far still has strong competition from retail. There still are strong players like Gamestop, Best Buy, Walmart, Amazon etc. and Steam launch prices well above retail launch prices might be rooted in pressure from retail competitors.

So, what’s the problem? Valve does not have a monopoly and is providing a great service. Why all the fuss? The problem is that there is a good chance of Steam becoming a monopoly in the not so distant future. But then the Internet generally does have a tendency to produce monopolies or structures resembling monopolies (e. g. Google, Facebook, Ebay, Amazon, WoW). The main reasons for this are things like lock ins, market power, economies of scale and network effects. Regarding Steam its current market power probably is the strongest reason of it becoming a monopoly.

Why is Steam becoming a monopoly?

Market Power

Steam already has about 70-80% market share in digital distribution while retail sales are declining (already approaching 50% of total sales according to EA or NPD). This means that Steam probably is rapidly getting more market power than the old behemoths like walmart (35-40% of total sales). If you want to produce AAA games and sell them, you basically cannot ignore Steam (well, actually you can, more on that later). So chances are that Steam already might be the largest single reseller of games worldwide.

Then there is Steamworks. Games companies can use it for free (mainly, there is no information available if large companies are required to pay for it or if there a additional drawbacks in the contract when using it), it offers copy protection, matchmaking services, achievements and lots of other fancy stuff a company usually would have to pay a shitload of money if bought somewhere else or programmed by themselves. It’s a great product that does help a lot of (especially indie-)companies to create games. But there is one big problem:

Integrating Steamworks means that the company will heavily promote Steam as the full Steam client has to be run anytime you play the game. Anytime you start a Steamworks game a customer gets notified of Valves great sales increasing the chances of selling more games over steam. This is why some digital distributions platforms and retailers fear steamworks and threaten not to sell any game using it. Sell 1 game and loose the following 10 sales to Valve further strengthening Steams market power. From a consumer point of view having to start the full frontend of Steam just to play a game can be even quite annoying but for Valve it probably is one of the most important factors driving additional sales (just think about if you just wanted to play a game but had a quick look at the sales just before that).

Lock in

With lots of sales customers will find themselves sort of locked in into buying more products using Steam mainly due to convenience. It is just nice to have all your games at one place where you can find and start them quickly and don’t need to remember all you different accounts and passwords if you want to reinstall a game. This lock in is quite weak though (nothing compared to the stuff Apple does), but the added convenience will allow Valve to sell games at a slightly higher price than its competitors without loosing customers. Get your customers with great sales and at some point they will even prefer to buy the overpriced launch titles because it is more convenient.

Size and economic barriers

Another factor promoting monopolistic tendencies are the sales. They are great for customers and I personally am buying more games than before just because they are so cheap. But it already seems to be the case that at least in digital distribution Steam always is offering the best sales available. Impulse, Direct2Drive or GoG never seem to have that many titles on sale or at a sale price as low as Steams during their holiday sales. One reason for this probably is just size again. The bigger you are the less you will pay for bandwith and payment providers. And it allows you to have sales where you do not need to make a profit at all or even a loss if it leads to new customers. Smaller competitors might not have the capital to compete with these sales and publishers might no be willing to sell their games at low prices if the user base is small. The only ones being able to put some pressure on Steam are the very large competitors. Sales from Microsoft like Age of Empires III for 0.10$ are an attempt to widen the user base by selling at a loss, something a company can only do if it has enough cash (it probably would have been cheaper to give the game away instead of charging for it; but this way people already used their credit card and might be more eager to buy another game, as MS already does have their details).

In the end their is a strong possibility of Steam becoming a defacto monopoly.

Why should this be a problem at all?

But what are the problems with that? Valve is offering a conveniant way to buy games, the copyright protection on Steam is relatively relaxed compared to other DRM systems, the community features are great and effective game prices are ridiculously low, when someone mainly purchases titles on sale.

Company size

First, companies have a tendency to change when they grow and develop a life of their own. All the different teams and departments someone finds in a large a company make it impossible for any CEO (regardless how nice this CEO may be) to have a thorough overview on what is going on. A large company can only be managed by adding lots of bureaucracy and red tape while strictly controlling the different departments to make sure that money not thrown down the drain. So money becomes an important factor in measuring if the different departments are doing what they should do, adding pressure to the management to maximise profits whenever it can. Even without a change in upper management this can lead a company to become more “evil” (Microsoft and Google started as the “nice” companies but are widely regarded as “evil” nowadays).

Higher prices

Second, a monopoly might lead to higher prices as maximising profits becomes more important than getting new customers. Valve would not have an interest in sales that do not generate (enough) profit for them anymore. 80% or 90% sales and especially sales below 5$ might not be worthwhile leaving sales at something like 50%. Being large enough would allow Valve to contractually obligate publishers wanting to sell on Steam not to sell below the Steam price anywhere else (Amazon does something similar on their marketplace) thus making sure that competition cannot arise.

Less innovation

Third, a monopoly does hinder technological advances. As long as the user experience would not be devastating there is not much incentive to invest into new things, something that can be observed today already. A lot of Steam updates and Valve policies are about getting new customers and getting customers to build up their games library. I still wonder why nobody at Valve did not develop a user friendly (I know that it is not that hard, but the way it currently works is not user friendly) function to migrate Steam onto another hardrive/partition or to install individual games onto another harddrive. But then, someone who already bought 200 GB of games is likely to be locked in and willing to make an effort in order migrate his games. A new user probably just thinks, that 200 GB will be more than enough for his purchases. A function like this would add to the user experience of long term users (and has often been suggested on the official forums) but probably would not generate any extra income.

Not all that bad?

But in the end, even if Steam would become a monopoly it would not be the end of PC gaming. Luckily monopolies on the internet do not have as bad effects as actual natural monopolies. Technological advances can lead to an abrupt decline and to the rise of a competitor. Take a look at Google. Although they de-facto have a monopoly they still have to give out all the freebies (to gather the data they need) in order to keep on top. And Facebook is a strong competitor who might change the way people search and find things on the internet. In gaming there is one decisive factor that can explain Valves success and the probability of other gaming companies becoming serious competitors. Not Steam, it’s a good platform but it does have its cons. It’s having an outstanding quality game. In my opinion the single most important reason for Steams success can be summarized in 2 words:

Half Life (2)

It’s one of those games every PC gamer should have played. When it came out Valve was badly critized for integrating Steam into it and lots of players swore that they would never buy it. But then hardcore gamers usually are not very strong-minded when it comes to oustanding games. They will rant about it on the internet, but at the end of the day they will purchase a great title even it comes with SecuRom, allows 5 or less installations or requires Steam to be installed. Without the exclusive Half Life 2 and the added support of Half Life 1 and its mods Steam would never have gotten the userbase required for other publishers to jump on the bandwagon. They never would have gotten enough data from their own sales to convince other publishers to partake in those sales. Chances are that without Half Life and Half Life 2 digital distribution would be only a small margin of total PC games sales.

Possible competitor(s)

Looking at games companies the biggest potential competitor might no be MS but Blizzard. Like Valve Blizzard is known for high quality games that pretty much are must buys for PC gamers. Almost every PC gamer will have played at least one Blizzard title. Blizzard is pretty much the only large publisher not having a single game on Steam and they just don’t need to. Games like Diablo 2 or Starcraft are still being sold at 15$ and more and Starcraft 2 had launch prices compared to console games. They are one of the few gaming companies that probably can do whatever they want and still everybody is going to buy their games just because they are too good to miss out. For Star Craft 2 they completely overhauled their Battle.net service and i do wonder if the programmers added Steam like platform functionalities. It is already attached to the Blizzard store and Battle.nets huge userbase would make it instantly Valves strongest competitor in the field even if someone does not take into account that they could directly add all the Activion titles to their portfolio.